Alix Capital: Market Neutral Up, Fixed Income Down

29 Feb 2012

Alix Capital, the Geneva, Switzerland-based investment boutique responsible for the calculation and marketing of the UCITS Alternative Index, has polled the recipients of its index performance updates about their investment intentions for the coming quarter, what they think of the future of the UCITS hedge fund industry, and related questions.

Forty-five respondents completed the questionnaire by mid-December 2011. Seventy-three percent of them were either fund managers or fund of funds managers. Most of the remaining respondents were either investors or service providers.

Strategies and Allocations

Among the questions Alix Capital asked the respondents was whether, for each of eleven UCITS hedge fund strategies, they planned to increase, decrease, or maintain that portfolio allocation. Majorities expressed satisfaction with the current level of allocation for certain strategies: commodities, emerging markets, forex, and macro global strategies. But there was a lot of interest in increasing allocations to CTAs, equity market neutral, and volatility-based strategies.

The resulting report says that by comparing “the average allocation intention for each strategy with the previous quarter’s results, one can see that the trend to increase allocation in CTA and Equity Market Neutral is persisting over time.”

The strategy that receives the most negative response (largest intended reduction), on the other hand, is fixed income. This is despite the relative good performance of fixed-income managers last year.

One of the great uncertainties for the market at this time is the impact of the Alternative Investment Fund Managers Directive (AIFMD), a framework for regulation approved by the Council of the European Union in May 2011, in order to bring transparency and supervision to non-UCITS hedge funds, private equity, and other sorts of fund marketed within Europe.

Will AIFMD make non-UCITS hedge funds more attractive to European investors, removing the incentive for hedge funds to choose the UCITS brand? As you can see, only 4 percent of respondents expect that to happen. Forty percent expect an opposite result – AIFMD will have a “positive impact on the growth of UCITS hedge funds.”

No one among those questioned thought that, going forward, hedge fund managers will tend to offer investors UCITS hedge funds exclusively. Nor did anyone expect that managers will offer non-UCITS funds exclusively. But the respondents who answered “mainly UCITS hedge funds” far outnumbered those who though “mainly non-UCITS hedge funds,” 42 percent to 24 percent. It seems likely, then, that UCITS hedge funds have a lot of growth ahead of them.

What About Platforms?

The poll asked respondents whether they thought that over the next one to two years the market shares of UCITS hedge fund platforms within the UCITS hedge fund space will continue to increase.

As you can see from the graphic below, a clear majority answered that it would “continue to increase.” The poll also allowed for a more complicated answer, that the market share of platforms would “continue to increase in the first place and then decrease” as the market matures (presumably still within the 2 year time frame). More than 15 percent of respondents agreed with that. Combining these two answers, 73 percent thought it would increase at least in the short term.

The poll examined what managers want from a platform, why they opt for one rather than another. The most important criterion was the platform’s cost structure. Its size and its capital-raising/marketing ability third. As the report notes, the significance of cost and marketing is intuitive, but the high ranking of platform size on this list is intriguing.

“The answer does not allow [us] to say if big is better than small or vice versa, but it may indicate that there is a different optimal platform size for each manager.”

A separate question: what do investors want from a hedge fund platform? Here the highest-ranked answer is “infrastructure and counterparties.” The second is the legal aspect of the set-up, and the third is risk management.

The quality of managers, though, did not rank high as one of the things investors look for in a platform. This means, presumably, that “platforms are not perceived as adding much value to the quality of managers that they host.”

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